CEE Macroeconomic and Fixed Income Research

Analysts’ View:

CZ Rates and FX: At yesterday's CNB meeting, the Bank Board unsurprisingly decided to leave its two-week repo rate unchanged at 0.05% and confirmed the current exchange rate cap at 27 CZK/EUR. However, in spite of the apparent strengthening in domestic economic activity, helping to boost demand inflation, the CNB currently finds the risks of its February forecast (CPI at 1.6% at the end of 1H16) anti-inflationary, which implies an increase in the probability of further EURCZK weakening. Although the stronger crown vs. the euro is presently considered by the CNB to be one the key factors (alongside the rather subdued wage growth) behind the ongoing accumulation of anti-inflationary risks, we see the current rather dovish wording as an effort to ward off the pressure on CZK appreciation down to 27 vs EUR, rather than aiming to support CPI growth. In a reaction to the governor's comments during the press conference, the EURCZK temporarily appreciated up to 27.55. As the CNB will most likely continue to verbally intervene in the coming months, we maintain our EURCZK forecast at 27.60 at the end of 1H15.

RO T-Bonds: In line with the issuance target, the MinFin sold 1-year T-bills worth RON 1 bn yesterday; taking advantage of pretty decent demand (the bid-to-cover ratio was 1.6). The average accepted yield stood at 1.62% (+16 bps compared to the previous tender held in mid-February). On the secondary market, yields across the curve also moved higher (medium- and long-term yields were up 6-7 bps, while short-term yields were up 9 bps) apparently due to low market liquidity. We maintain our 5-year ROMGB yield forecast at 2.3% for the remainder of this year.